Impact of Credit Ratings on Stock Returns

Reddy, Krishna; Bosman, R.A.; Mirza, Nawazish

doi:10.21098/bemp.v21i3.986

Cited by 4 publications

(2 citation statements)

References 46 publications

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“…Employing monthly return rates and different time horizons, they gave contradictory results. Current studies (from earlier [6] to more recent [7] papers), which make use of daily return rates and consider the influence of credit rating change in a narrow event window, yield more consistent results (this may be due to the fact that the amount of information that is publicly available and relevant for share price formation is increasing in volume and spreading at an ever-growing rate). These studies share the conclusion that, unlike upgrades, downgrades significantly influence the market value of shares.…”

Section: Literature Reviewmentioning

confidence: 97%

Testing Russian Stock Market Efficiency Using Event Studies: Impact of Credit Ratings Changes

Avrutskaya

Maricheva²

2021

КФ

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Event study is a widespread technique for testing the semi-strong form of the market efficiency hypothesis. Among traditionally studied events, changes in corporate credit ratings by rating agencies have a special importance, since rating agencies use both publicly available and insider information. Studies of developed and emerging markets point to different reactions of stock prices to rating upgrades and downgrades and identify several factors affecting the scale of this effect, including the size and liquidity of the stock market, the level of regulation of the industry, the market capitalization of the company, the status of the rating agency, and others. On the Russian market, the impact of credit rating upgrades and downgrades on stock prices has not been investigated so far. Ongoing studies of other events affecting stock prices show that the market’s reactions are pretty much in line with those of developed markets, despite its immaturity, limited transparency, high volatility, narrowness and low liquidity, as well as the small number of significant events. In this article, we evaluate the level of efficiency of the Russian stock market and analyse the reaction of stock prices to changes in issuer credit ratings by international rating agencies using the traditional event study methodology in a narrow event window of 31 days over the period 2016–2020 on a sample of 49 public companies. We show that credit rating upgrades do not lead to statistically significant positive abnormal returns. Visual analysis demonstrates that rating downgrades result in substantial negative abnormal returns. This effect varies for financial and non-financial companies and companies with low and high capitalization yet differs from the effects observed for developed markets; nevertheless, these abnormal returns are not statistically significant. Still, there are grounds to conclude that the Russian stock market is not efficient in the semi-strong form and is closer in its characteristics to emerging markets, which is important information for investors, as it permits them to develop profitable trading strategies.

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Section: Literature Reviewmentioning

confidence: 97%

Testing Russian Stock Market Efficiency Using Event Studies: Impact of Credit Ratings Changes

Avrutskaya

Maricheva²

2021

КФ

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“…High credit ratings do not mean that an entity is perfectly safe. Even a firm with AAA rating, that is, highest rating, has approximately one chance in 600 of default over 5 years (Reddy et al, 2019). The difference in credit quality decreases with each decrease in notch down the scale.…”

Section: Introductionmentioning

confidence: 99%

Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market

Dawar

Bhatia

Bindal³

2021

Business Perspectives and Research

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The current investigation aims to assess the effect of credit assessment changes on the share prices of Indian companies from 2009 to 2019. The data of top 100 companies listed on National Stock Exchange (NSE) across 10 industries stem from CMIE databases. The excess stock return is compared with the market in a 15-day window around credit rating changes. The event effect on share prices is more in the pre-event window compared to the post-event window. Positive abnormal stock returns around upgrades through downgrades are statistically significant compared to upgrades. Credit ratings are not significant across industries, and agency nationality is a critical factor for calculating the intensity of price reaction.

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Which is the best: A comparison of asset pricing factor models in Chinese mutual fund industry

Sha

Gao

2019

Economic Modelling

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Impact of Credit Ratings on Stock Returns

Cited by 4 publications

References 46 publications

Testing Russian Stock Market Efficiency Using Event Studies: Impact of Credit Ratings Changes

Testing Russian Stock Market Efficiency Using Event Studies: Impact of Credit Ratings Changes

Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market

Which is the best: A comparison of asset pricing factor models in Chinese mutual fund industry

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